After posting an annualized contraction in Aug-24, India’s industrial production recouped some of its momentum with headline growth printing at 3.1% YoY in Sep-24. This was marginally better than the market consensus estimates of 2.5%.

Key highlights 

• On a sequential basis, IIP rose by 0.7% MoM in Sep-24, in line with the series median expansion seen in the month of September. 
  1. Among the 25 sub-sectors of IIP, 15 registered a sequential expansion, while 10 saw a sequential contraction. 
• Sectoral classification:
  1. Annualized growth was pulled up single handedly by the manufacturing sector, which expanded by 3.9% in Sep-24. In comparison, growth in accompanying sub-sectors of Mining and Utilities was subdued, at 0.2% and 0.5%, respectively. 
  2. Within the manufacturing industries, the top three performers on an annualized basis were Furniture, Electrical equipment and Other transport equipment. 
  3. On the other hand, the three worst-performing sectors were Printing and reproduction of recorded media, Leather & related products, and Computer, Electronic and Optical Products 
• As per the use-based classification, annualized growth was led by Consumer durables and Intermediate goods yet again. Encouragingly, growth in consumer non-durables swung into positive (+2.0%YoY) after a hiatus of three months. 

Outlook

The return of industrial production activity to expansion territory offers relief. Nevertheless, concerns continue to persist. The pre-festive ramp-up in IIP appears moderate at best (3.1% annualized growth in Sep-24 is the weakest print in the last 8 months if one were to ignore the negative print in Aug-24). Preliminary evidence from Q2 FY25 earnings declaration by non-financial corporates points towards moderation in sales and some erosion of profitability.

However, the loss of activity momentum is not entirely cyclical. Idiosyncratic factors like weather-related disruptions (heat wave during the summer season followed by the uneven intertemporal spread of rainfall in the southwest monsoon season) and slow disbursal of central government spending on account of elections (total expenditure excluding interest payments contracted by 2.3% in H1 FY25 vs. an expansion of 17.9% in H1 FY24) provided a temporary setback.

These temporary headwinds will fade during Q3 FY25 as record kharif produce becomes available (which is likely to buoy rural consumption demand) while the central government steps up its expenditure to meet the budgetary targets.

While that augurs well for industrial production, the outlook will continue to remain clouded by the following developments:

• The global environment is getting increasingly uncertain. Slowdown concerns have gripped countries in Europe, Latin America, and Asia. Although Trump’s return to power is likely to improve the near-to-medium-term growth outlook for the US economy, it could be accompanied by volatility in trade, labour, and foreign policy, which per se would have a detrimental impact on global economic sentiment.
• Domestic urban demand is likely to continue to moderate amidst the lagged impact of past monetary and regulatory tightening done by the RBI. This, coupled with slower growth in urban jobs and volatile food inflation, could continue to weigh on the pace of urban consumption.

Overall, the industrial outlook appears cautious, with traces of optimism. From a GDP perspective, with input price inflation likely to swing from negative in FY24 to positive in FY25 (we expect WPI inflation to increase to 2.5% in FY25 from -0.7% in FY24), the industry value-add could see moderation on account of margin compression.

Says Suman Chowdhury, Executive Director and Chief Economist, Acuité Ratings & Research, “India’s industrial activity witnessed a moderate recovery in Sep-24 after a surprise output contraction in Aug-24. Manufacturing output posted a modest growth of 3.1%. While mining and electricity barely recovered from their contraction from last month, posting 0.2% and 0.5% YoY growth, respectively, the growth came from manufacturing. Consumer goods output saw a strong recovery from 0.6% last month to 3.9%, with non-durable goods reviving sharply from -4.5% YoY in August to 2.0% in September.

Despite such volatility, cumulative IIP growth is moderately healthy at 4.0% YoY for the first half of the fiscal. Looking forward, we anticipate a notable boost in industrial output from Oct'24 onward, spurred by increased government spending on infrastructure projects. However, we expect IIP growth to expand at a more temperate pace of around 4.5-5.0% in FY25, down from 5.9% in FY24. This may weigh on overall economic performance. While we maintain our 7.0% GDP growth forecast for FY25, recent indicators from Q2 signal increased downside risks to this outlook.” 

Table 1: Annualized growth in IIP and its key components

Chart 1: IIP growth has moderated in the first half of FY25